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Korea’s nuclear program and missile launches go unchecked. There is rising risk of military incidents—or accidents—in the South China Sea and across the Taiwan Strait. China is the most likely source of global economic shocks over the next two to three years. The country’s leadership continues to prioritize imbalanced economic growth over structural reforms, thereby increasing debt at an unsustainable pace. Such increases will eventually prove to be destabilizing. In Donald Trump, the US has elected an unconventional president in many respects, including his more US-centric approach to China. If China responds to, say, imposition of US tariffs on imports of Chinese products by sharply devaluing the renminbi, significant downside volatility and tighter global financial conditions will follow. Given already high US equity valuations, uncertain economic and political policy prospects and heightened geopolitical risks, readers may well ask why we continue to recommend staying fully invested in US equities. Among the reasons: ¢ Our eight-year US preeminence theme is intact and continues into its ninth year. As Professor Jeremy Siegel of the University of Pennsylvania wrote 23 years ago in Stocks for the Long Run' and recently repeated in a Wall Street Journal interview,’ “Stocks are the best long-run asset.” We refine that view by saying US equities are the best long-run asset. e We think that the policy backdrop in the US will be particularly favorable for the economy, with looser fiscal policy, relatively easy monetary policy and a less stringent regulatory environment. We expect US growth to continue through 2017. e We expect global growth to improve modestly, from 2.5% in 2016 to 2.9% in 2017, with looser fiscal policy and still easy monetary policy in key countries. e And last but not least, we expect that while President-elect Trump’s initial policy measures with respect to tariffs and trade agreements risk jolting financial markets, as a self-described “deal maker” he will likely adjust and change course as necessary to achieve his desired results. We may have a bumpy ride, but the US economy will not be derailed. Over the years, we have viewed the glass as half-full—if not full—when it comes to the US economy. Many others have seen the glass as half-empty, pointing out that productivity growth has decreased, US labor demographics are less favorable and government policies have been ineffective. While it is correct that productivity growth has decreased and labor demographics are less favorable, it does not follow that the US economy is in stagnation. Quite the reverse. 2 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014535